Major Malaysian Banks Prepared for Basel Funding Rules-Fitch

3/10/2017/Fitch Ratings

Most major Malaysian banks are unlikely to face difficulties in meeting net stable funding ratio (NSFR) requirements announced last week as part of Bank Negara Malaysia’s (BNM) implementation of Basel III regulations. The banking sector has already shifted towards more stable funding structures in recent years, which should reduce vulnerability to market disruptions, says Fitch Ratings.

BNM has said that more than three-quarters of Malaysian banks have an NSFR that meets the minimum requirement, which will be set at 100%. Indeed, most major banks have strong domestic deposit franchises and prudent funding and liquidity policies that should help them comply with the new rules. Moreover, the banking sector’s loan/deposit ratio of 89% and liquidity coverage ratio (LCR) of 133% at end-August 2017 indicate that the system’s aggregate funding and liquidity are reasonably healthy.

Most banks have already made efforts to increase their retail deposits in recent years in anticipation of the NSFR rules and in response to LCR requirements, which BNM started to phase in from 2015. The NSFR and LCR frameworks both consider retail deposits to be more stable than corporate deposits and treat them more favourably. Retail deposits accounted for around 43% of total deposits at the top five banks at end-June 2017, up from 40% at end-2013. Similarly, the system-wide NSFR ratio has risen to 107% at end-June 2017, according to reported statements by a BNM deputy governor last week. This was an improvement from 103% as disclosed by BNM at end-2016.

Banks are likely to continue to prioritise stable sources of funding as they grow their balance sheets. In particular, we expect a further move away from short-term funding, which is discouraged under NSFR and LCR rules. Fixed deposits maturing within one month fell to 18% of total fixed deposits at end-August 2017 from 29% in January 2013 as the 30-day LCR was phased in. The NSFR metric focuses on a 12-month timeframe and is likely to encourage banks to compete more aggressively for even longer-tenor deposits, and shift towards long-term wholesale debt funding. Banks are also likely to offer higher rates on longer-term deposits and shift towards longer-term wholesale debt funding. This could, to an extent, raise funding costs and lower net interest margins, but the impact on profitability is unlikely to be significant for the large banks or the banking sector as a whole.

Banks may also look to manage their assets to reduce their required stable funding. Highly liquid assets, short-term loans and mortgages with conservative loan/value ratios are all treated favourably under NSFR rules. Meanwhile banks may seek to further streamline committed undrawn facilities as these would need to be partly pre-funded under the regime.

Meeting the requirements may still entail significant balance sheet adjustment at some banks, but they will have time to make adjustments. The new rules will be implemented no earlier than 1 January 2019, which would be at least a year behind the scheduled global implementation date of 1 January 2018 set by the Basel Committee. That said, implementation could also be delayed in the US and the EU, while only a handful of APAC jurisdictions – Australia, Hong Kong, Indonesia and Singapore – have announced plans to implement the rules by 1 January 2018.

Banks will also need to report their NSFR by currency. There are no currency-specific NSFR requirements, but disclosure will help BNM monitor the stability of banks’ funding sources by major currency exposure. Fitch believes that Malaysia’s banking groups with significant overseas operations – such as Maybank and CIMB Group – generally manage their foreign currency funding and liquidity needs well.